Sunday, October 21, 2007

The Death of Inheritance Tax

Inheritance tax

The chancellor recently increased the tax threshold for inheritance tax to £600,000, for married couples. This was widely seen as a popular move; in effect the government were merely stealing a popular idea of the Conservatives. There was little if any support for the benefit of an inheritance tax, which is strange when we consider the nature of inheritance tax.

Inheritance of wealth exacerbates inequality in society.Inheritance of wealth creates disincentives to work. If young people inherit large sums of money then there is the potential for them to avoid working.A tax on wealth is efficient. An efficient tax is one that doesn't distort the workings of a free market. For example, an income tax may discourage people to work. A tax on goods creates disincentives to buy them. But, generally speaking a tax on inheritance does create disincentives, in fact the opposite can occur.

An inheritance tax may force people to sell homes, but, this is not necessarily a bad thing. It helps to avoid inflated house prices. If 50% of the population were to inherit a house, it would mean that the other 50% would have great difficulty in buying a house, creating inequality.

Equality of opportunity. The social philosopher John Rawls, suggests that the best outcome for society is one where we would be equally happy to be born in different circumstances. Large inheritance enables people to have inequitable opportunity.

Removing inheritance tax means other taxes will have to rise. (the governments proposed tax on foreigners will not meet the £2 billion loss). People don't like inheritance tax, but, they will dislike, even more, the other taxes that have to be increased as a result.